The economic power of Gulf oil and gas

In the aftermath of the Deepwater Horizon well blow-out, the debate now centers on the oil and gas sector’s future role in the Gulf of Mexico. While the focus has been on environmental impact and technical challenges, and on the effects on local fishing and tourist industries, less attention has been paid to the considerable economic significance of the entire oil and gas sector. Even less well understood is its national impact — in terms of jobs and government revenues.

The Gulf accounts for nearly 30 percent of all U.S. oil production and 10 percent of U.S. natural gas. The strategic importance of Gulf of Mexico oil and gas operations helps explain the Obama administration's decision on Tuesday to lift early the moratorium it had placed on offshore drilling activity there. Because of the Gulf’s deepwater area, last year the United States actually recorded an increase in domestic oil production for the first time since 1991.

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But this economic contribution is not well recognized beyond the immediate region.

The economic significance is far greater than generally appreciated, according to our IHS Global Insight study, contributing more than 550,000 jobs and more than $90 billion in gross domestic product to the national economy.

At a time when unemployment and job creation are a grave concern – and job losses and gains register nationally — it is important to consider that a large number of jobs depend on the off-shore industry. It accounts for nearly 400,000 jobs in the four surrounding Gulf states of Louisiana, Texas, Alabama and Mississippi. These are direct jobs as well as those created around the oil and gas industry. So it generates $70 billion annually in economic value, as well as $20 billion annually in tax revenue and royalty payments to local, state and federal government.

If the industry continues growing at the same rate, all those numbers would become significantly bigger. The total employment is likely to reach about 520,000 jobs in 2020, and economic value could hit about $113 billion by that year. The effect on government revenues is high. Between 2011 and 2020, approximately $275 billion in federal, state and local tax and fee payments is likely to be collected from the direct activity in those four states.

Those numbers actually understate the importance. For the total economic effect is even larger. We limited this study to those four states. It does not include the people who build helicopters in Connecticut and Pennsylvania, or compressors in the Midwest, or the jobs created by the numerous other products and services around the country that support the oil and gas industry. Nor does it include the federal and state tax revenues generated by companies in other states that supply the industry, nor the taxes paid by investors in those companies who reside in the other 46 states.

In the aftermath of the Deepwater Horizon tragedy, new policies and rules are being devised to assure future safety. While the moratorium on deep-water activity is now lifted, uncertainty remains about future regulatory policy and how quickly present and future rules can be implemented. That means the timing and nature of future development is no longer clear.

But, as this new system is debated and developed, it would be costly to the entire country if the Gulf oil and gas industry’s large economic significance, as well as its strategic importance, were overlooked.

James Diffley is senior director and chief regional economist at IHS Global Insight and lead author of the study, "The Economic Impact of the Gulf of Mexico Offshore Oil and Natural Gas Industry and the Role of Independents."